Introduction
Since mid-1999, after the introduction of the inflation-targeting system, the Brazilian monetary authority
pursues a single official objective, the control of inflation, which must remain inside a pre-defined range around
a center value in each calendar year (defined since 2005 as 4.5% a year plus or minus 2%). After a period in
which inflation was above the upper limit of the inflation target range in almost every year (1999-2003), since
2004 the central bank has been successful in keeping inflation within the target range every single year.
However, from 2010 to 2014 inflation got very close to the upper limit.
Most analyses of Brazilian inflation during this period (even that of economists that consider themselves
heterodox or critical) tend to confuse the institutional framework of inflation targeting, which actually exists,
with the so-called new consensus model (or sometimes even with its more complex and unrealistic DSGE or
new neoclassical synthesis version) that is often used rhetorically to justify and explain the inflation targeting
system. But that model (in any of their versions) has no basis in Brazilian reality and seems to exist only in the
minds of some economists (Serrano (2010a)).
The most salient evidence of this confusion is the widespread (but incorrect) belief that in Brazil inflation is
actually controlled through the management of aggregate demand, and the latter mainly through the
manipulation of the basic interest rate by the Brazilian central bank. In reality, inflation in Brazil is a cost-push
(not a demand-pull) phenomenon and the way the interest policy of the Brazilian central bank actually operates
(whether or not some of the policymakers are really aware of it) is through the strong impact of interest rate
differentials on the rate of change of the nominal exchange rate (in situations in which there is no external
credit rationing nor strong political objections to further appreciation of the exchange rate). This means that a
policy of high interest rates usually leads to a process of exchange rate revaluation which lower the prices of
tradable goods and inputs in local currency, which by their turn also decrease the prices of a number of
government monitored private utility and service (which are partially indexed to tradable prices) and thus tend to
lower cost inflation in the economy. Therefore in Brazil, not only inflation is not caused by excessive growth
of aggregate demand, but also the only effective and systematic transmission mechanism of monetary policy is
the exchange rate cost channel briefly described above.
In this paper we analyze the evolution of Brazilian inflation under the inflation targeting system according to this
cost push interpretation. We first discuss (in section 2) some essential characteristics of the Brazilian cost
inflationprocess and the transmission mechanism of monetary policy. We then identify (in section 3) the main
features ofthree quite distinct phases mentioned above (1999-2003, 2004-2009 and 2010-2014) and explain
them in terms of tradable price trends in U.S. dollars and in local currency (i..e., converted by the nominal
exchange rate), of the changes in the dynamics of the so called monitored prices and the behavior of wage
inflation. Each of these three components is analyzed in more detail in the subsequent sub-sections, namely,
tradable prices in local currency (section 3.1), monitored prices (section 3.2) and wages (section 3.3). In
section 4 we look at the changes in the wage share that have resulted from these distinct phases of cost-push
inflation.
We conclude (in section 5) that the fact that the exchange rate policy has changed and now there has been
a trend towards continuous nominal devaluation after mid-2011, together with the fact that the strengthening of
the bargaining power of workers has led to a trend of rising (nominal and) real wages since 2006 means that
distributive conflicts in Brazil are getting much more intense. And this explains the increasing difficulties of
keeping inflation lower than the upper limit of target range.
We also suggest that the apparently very irrational recent (early 2015) change in the orientation of economic
policy towards contractionary fiscal, incomes and monetary policies in a situation in which the economy is
already stagnating (see The Economist (2015) and Serrano and Summa (2015b)) seems to be ultimately
based on the desire to weaken the bargaining power of workers that was (perhaps inadvertently) much
strengthened during the brief but intense Brazilian “golden age” of 2004-2010 (see Serrano; Summa
(2012), Weisbrot et alli (2014)). To read the paper here